Question
(Don't copy the answer)Economists represent a good/service which has a fixed size/amount with a vertical (linear) supply curveno matter how the market price may change,
(Don't copy the answer)Economists represent a good/service which has a fixed size/amount with a vertical (linear) supply curveno matter how the market price may change, the amount of the good does not. A common example is a small island. A stretch of highway also is an example since, in the short run, the supply of available space is fixed.
Suppose there is one (and only one) 4-lane highway that bisects a city. Commuters from the outlying areas use this highway to get to work in the morning and home in the evening. Other roads exist but they are very curvy with many traffic lightsunsuitable options. Assume you own the highway. Also assume that the demand to drive a vehicle on the highway is given by P = 100 - Q (where Q is the number of vehicles and P is the market price of having the right to drive on the highway). The maximum number of vehicles the highway will support in a particular unit of time is fixed at Q = 100. For simplicity, assume your marginal cost is zero (MC = 0). Answer both parts below in under page, showing all calculations. Drawing a graph of the demand and vertical supply curves might help. Also, consult the textbook.
- If you want to maximize profit, how many vehicles should you allow on the highway and what price should you charge?
- If you want to maximize economic surplus, how many vehicles should you allow and what price should you charge?
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